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Garber v. Randell

decided: April 9, 1973.


Lumbard, Kaufman and Mansfield, Circuit Judges.

Author: Mansfield

MANSFIELD, Circuit Judge:

In these three consolidated class and derivative suits by stockholders of National Student Marketing Corp. et al. ("NSM" HEREIN),*fn1 WHICH ALLEGE VIOLATIONS OF THE FEDERAL SECURITIES LAWS ON THE PART OF SOME 58 DEFENDANTS, THE LAW FIRM OF White & Case ("W & C" herein), originally named as a defendant in one suit only (the Natale action), appeals from two orders of the District Court for the Southern District of New York entered by Chief Judge Edelstein. The first order, filed on April 20, 1972, directed, among other things, that the three actions (including the Natale suit) be consolidated for pretrial purposes and that plaintiffs file a consolidated amended complaint, which has since been served on June 5, 1972. The second order, dated February 14, 1973, denied W & C's motion for a severance, 58 F.R.D. 492. We reverse the first order insofar as it directs the filing of a consolidated complaint and in all other respects affirm both orders.

Two of the actions (the Garber and Lipsig suits) are purported class suits by NSM stockholders which charge that during the period from April 1968, to March 1, 1970, the defendants, who include various directors and officers of NSM; Peat, Marwick, Mitchell & Co. ("PMM" herein), its independent auditors; and various stockbrokers, investment banking firms, and public relations firms, used materially false and misleading financial reports, statements, releases, predictions and estimates to inflate the market price of NSM shares, with resulting benefits to some of the defendants and loss to those who purchased shares during the relevant period, all in violation of § 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and SEC Rules issued thereunder, notably Rule 10b-5, 17 C.F.R. § 240.10b-5.

The Natale complaint, which joined W & C as a defendant along with those named in the two earlier suits, contains basically the same allegations on behalf of purchasers of NSM shares during the same period (April 1968 to March 1, 1970) without specifying any conduct on the part of W & C alleged to have violated the federal securities laws. Natale's designation of W & C as a defendant was apparently inspired by the SEC's inclusion of W & C as a defendant in a suit for injunctive relief instituted by the SEC against most or all of the same defendants in the United States District Court for the District of Columbia shortly before the commencement of the Natale suit here.

The allegations of the Consolidated Amended and Supplemental Complaint are more detailed than those asserted in the three individual complaints and claim violations of both the Securities Act of 1933, 15 U.S.C. § 77a et seq., and the 1934 Act, 15 U.S.C. § 78a et seq. The consolidated complaint is for the most part devoted to charges of artificial inflation of NSM shares during the period from April 1, 1968, to February 17, 1972. Upon the basis of the complaint recently filed by the SEC, Paragraphs 16 to 29 allege, upon information and belief, on behalf of plaintiff Natale only, wholly distinct claims against W & C.

The principal claim against W & C relates to its activities as counsel for NSM in the closing on October 31, 1969, of the merger of Interstate National Corporation ("Interstate" herein) into NSM. It is alleged that in connection with that merger W & C failed to disclose to stockholders of the two companies that a "comfort letter" which was required to be furnished pursuant to the merger agreement by defendant PMM, accountants for NSM, did not conform to the terms of that agreement. According to the consolidated complaint, the comfort letter was to state that certain unaudited financial statements of NSM had been prepared in accordance with generally accepted accounting principles and that NSM had not suffered any material adverse interim change in its financial position or in the results of its current operations; instead, the letter revealed that there had been a material over-statement of NSM's current earnings in earlier unaudited interim financial statements used to solicit stockholder approval of the merger and that instead of the profit shown on the interim unaudited statement, NSM had suffered a loss for the period ended May 31, 1969, and would show a "break-even" for the year ended August 31, 1969.

The claim against W & C is that, notwithstanding its knowledge of the foregoing information and of PMM's recommendation that the merging companies should consider submission to their stockholders of the corrected financial data prior to proceeding with the closing of the merger, W & C and attorneys for Interstate (Lord, Bissell & Brook) nevertheless proceeded with the closing, respectively issuing opinions that all steps necessary to consummate the merger had been validly taken, without requireing a revision of the financial statements to reflect the material downward adjustment of NSM's earnings or insisting upon a disclosure of the earnings decline to the stockholders of both companies or to the SEC. It is further alleged that upon learning of the adjustment of earnings the directors of both companies failed to publish the information or notify stockholders and that W & C, acting on behalf of NSM, transmitted to the SEC a Form 8K containing false representations as to NSM's financial statements, and concealed the existence and contents of the comfort letter. On or about October 31, 1969, certain officers and directors of Interstate allegedly sold 77,000 NSM shares without disclosing the contents of the comfort letter.

Two other discrete claims are asserted against W & C: (1) that on November 20, 1969, it rendered an opinion with respect to NSM's acquisition of Compujob, Inc. concurring in an opinion by the latter's legal counsel which falsely stated that title to its shares had passed to NSM as of August 29, 1969, and (2) that on October 31, 1969, and November 20, 1969, W & C rendered opinions in connection with NSM's disposition of Collegiate Advertising Ltd., which falsely asserted that title had passed as of the end of August, 1969. The purpose of the alleged backdating of the transactions was to enable profits realized from them to be included in NSM's August 31, 1969, year-end financial statement.

It is not claimed that W & C profited from any of the foregoing conduct.

The threshold question is whether the district court's two orders, being interlocutory, are appealable. We have recognized that consolidation of stockholders' suits during pretrial stages pursuant to Rule 42 F.R.Civ.P. may benefit both the court and the parties by expediting pretrial proceedings, avoiding duplication and harassment of parties and witnesses, and minimizing expenditure of time and money by all persons concerned. See MacAlister v. Guterma, 263 F.2d 65 (2d Cir. 1958). However, where the claims against, or defenses of, some parties are substantially different from those of others, some may be prejudiced by consolidation, particularly if one general or lead counsel exercises his supervisory power in a way that tends to deprive them of full discovery and preparation of their individual cases. For these reasons the determination in each case as to whether the benefits from consolidation will outweigh the prejudice to individual parties rests in the district court's sound discretion. MacAlister v. Guterma, supra at 69-70; United States v. Knauer, 149 F.2d 519 (7th Cir. 1945), aff'd., 328 U.S. 654, 66 S. Ct. 1304, 90 L. Ed. 1500, rehearing denied, 329 U.S. 818, 67 S. Ct. 25, 91 L. Ed. 697 (1946), petition denied, 332 U.S. 834, 68 S. Ct. 210, 92 L. Ed. 407 (1947).

For essentially the same reasons the court's power to sever claims and order separate trials is likewise discretionary, requiring it to balance the factors of benefit and prejudice that will result from the alternative courses. The denial of a motion for severance will not, therefore, usually be set aside in the absence of a clear showing of abuse of discretion. Walsh v. Miehle-Goss-Dexter, Inc., 378 F.2d 409, 412 (3d Cir. 1967).

Since consolidation and severance are both discretionary and interlocutory, such orders are not ordinarily appealable. Levine v. American Export Industries, 473 F.2d 1008 (2d Cir. 1973) (consolidation); United States v. Garber, 413 F.2d 284, 285 (2d Cir. 1969) (severance).

"An order granting or denying consolidation, or granting or denying separate trials, is an ordinary, nonappealable interlocutory order. Severance orders are the same. Such orders are appealable only by certification and permission under 28 U.S.C. § 1292(b) [footnotes omitted]." ...

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